US housing markets could weaken further

US house pricesDec10.pngUS housing was the prime cause of the current financial crisis. US banks spent most of the 2000-7 period lending at low ‘teaser’ rates to borrowers who had no prospect of repaying the loan. And by syndicating the loans to gullible European banks, they ensured that losses were shared equally, when credit standards finally began to tighten.

This lending binge also led to a Boom period for the global chemical industry. US housing starts rose to 2.2 million in 2006, worth $35bn in chemical sales (in 2010 values), with each house worth $16k according to American Chemical Council analysis. In addition, China’s export-based manufacturing economy prospered (requiring ever-increasing volumes of chemical imports), as US demand rose for the goods required to furnish all these new homes.

The result is shown in the above chart, based on the authoritative S&P Case-Shiller Index for the 10 major US cities. From a base of $100k in January 2000, US house prices more than doubled to $226k by July 2006. Since then, they have fallen 29%. Housing starts have tumbled to just 600k, worth only $10bn in chemical sales. Now, the question is what happens next?

• Massive Federal support, including $8k tax breaks for purchases, has only led to a very modest price recovery. The index bottomed at $150k in April 2009, then peaked in July this year at $162k, just 8% higher.
• Unsold housing inventory (including foreclosures) already totals 6.3m homes, equal to 2 year’s sales at current rates, versus 6 – 7 months in the Boom.
• The index’s originators are cautious in their outlook. Karl Case says his Base Case is for prices to remain flat. But with “2 – 1 odds, I’d bet they go down“.
• Yale’s Prof Shiller refuses to forecast price changes, instead focusing on what he believes is a “catastrophic drop in confidence“. He also seems to share the blog’s view that we could be entering a New Normal, noting that “there’s been a cultural change which goes beyond any short-run forecasts“.

Chemical companies finalising their budgets for 2011 cannot afford to ignore this uncertainty. A Scenario approach seems the best way forward, as described in the blog’s own Budget Outlook:

• In a Base Case, housing starts and prices might remain broadly stable
• An Upside Case could hope for some improvement
• The Downside Case of lower starts and prices also implies greater uncertainty in the global financial system, as it increases the risk that more banks will fail.

As always, the blog will be happy to discuss these critical issues in more detail, if this would be helpful for your management team.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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2 Responses to US housing markets could weaken further

  1. Ian Telford 4 December, 2010 at 12:20 pm #

    scary figure for sure – 2 years stock unsold. What do you think the effect of the declining US$ will have? Will people pile in to buy 2nd homes or to escape the ensuing European social unrest!

  2. Paul Hodges 5 December, 2010 at 4:30 pm #

    Hi Ian

    Which currency would you rather own, though? Agreed the Fed is trying to push down the value of the US$, but then does the euro look very strong? Or the Japanese yen, or the British pound? These are the only 4 really international currencies, and they all seem to have major question marks against them!

    Paul

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